Thursday, March 03, 2016

Plaintiff’s Omitted Jury Instruction Misstated the Law

A district court did not err in refusing to include an instruction to the jury that a securities fraud plaintiff was required only to prove that the defendants failed to disclose material information, the Eleventh Circuit held. The jury was properly instructed that the defendant pharmaceutical company and its CEO are not liable for fraud if the plaintiff could not prove that they omitted a material fact necessary to keep other statements from being materially misleading (Fried v. Stiefel Laboratories, Inc., March 1, 2016, Pryor, W.).

Stiefel Labs acquisition. From 1987 through 1997, the plaintiff was the CFO of Stiefel Labs, then a family-owned pharmaceutical company. The plaintiff owned Stiefel shares both as part of a pension plan and outside of a pension plan and regularly met with company president Charles Stiefel, whom he considered a friend, about the company’s performance. The plaintiff sold his non-pension plan shares in October 2008 following a meeting with Stiefel that he interpreted as “kind of a sell signal.” He sold his pension plan shares in January 2009 for $16,000 each. The plaintiff was unaware that the Blackstone Group had been soliciting bids from other pharmaceutical companies and working with potential acquirers of Stiefel. In April 2009, Stiefel was acquired by GlaxoSmithKline for $3.6 billion, and Stiefel shareholders received nearly $70,000 per share as part of the sale.

The plaintiff sued Stiefel and Stiefel Labs on several grounds, including fraud under Rule 10b-5. The fraud claim went to the jury, which returned a verdict in favor of the defendants. The plaintiff appealed to the Eleventh Circuit, alleging that the district court should have included a sentence in the jury instructions that the defendants had a “duty to disclose all material information.”

Incorrect statement of law. On appeal, the plaintiff argued that an insider’s failure to disclose material facts when trading in the corporation’s stock is an omission under Rule 10b-5(b) and that the jury instructions should have reflected this. The Eleventh Circuit panel disagreed, however, noting that this interpretation is contrary to the plain text of the rule, which prohibits “mak[ing] an untrue statement of material fact or omit[ting] to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading.”

According to the panel, subsection (b) describes an omission that makes other “statements made” misleading, meaning that an affirmative representation is required to be actionable as fraud. While an individual with a duty to disclose by law may commit fraud under Rule 10b-5 by failing to disclose material information, the circuit has never stated that “failure to disclose material information is an omission under subsection (b) absent a statement made misleading by that failure.” Under the plaintiff’s reading of the rule, the defendants could be held liable even if they had never made any statements to him, the panel said.

The panel also noted that an insider who makes no affirmative representation but trades on nonpublic information may violate subsections (a) and (c) of Rule 10b-5, which are not as restrictive as subsection (b), because they do not require the making of a statement. The plaintiff’s proposed jury instruction did not require the jury to find that Stiefel Labs traded on the basis of material information and did not even mention the word “insider,” the panel advised.

Rule 10b-5(b) does not prohibit a “mere failure to disclose material information,” as stated by the plaintiff. His proposed jury instruction misstated the law and the lower court did not abuse its discretion in excluding this instruction to the jury, the panel concluded.